Union Budget 2021: From extending Income Tax holiday to dispute resolution panel, FM showers sops on startups


The startup and MSME sector had a long wish list from the Budget 2021. In the Budget, the following demands of the sector have been met.

Time limit for incorporation for eligible startup for claiming income tax holiday extended

Section 80-IAC of Income Tax Act, provided 100 percent deduction of the profits derived from an eligible business by an eligible startup for 3 consecutive years out of 10 years, incorporated before 1 April, 2021. The Budget has proposed to extend the incorporation period. Now, the aforesaid benefit of 100 percent deduction of profits can be claimed by eligible startup incorporated before 1 April, 2022.

Extension of timeline for period of transfer of residential property for availing capital gains tax exemption

Section 54GB provides exemption from capital gains (from the transfer of residential property on or before 31 March, 2021) utilised for subscription in the equity shares of an eligible startup. The Budget has proposed to extend the time period of transfer of residential property up to 31 March, 2022 now capital gains earned from sale of residential property up to 31 March, 2022 can be claimed as exempt by founders where invested for subscription in equity shares of eligible startups.

Proposed changes in company law provisions 

For benefitting startups, the government has proposed changes in companies law provisions, whereby Indian citizens staying in India for a period of 120 days (instead of 182 days) will be able to set up one-person companies and also non-resident Indians will be permitted to incorporate one-person companies. Further, the requirement for OPC to compulsorily convert to either a private company or public company, where the paid-up share capital exceeded Rs 50 lakh or turnover exceeded Rs 2 crore in three years preceding consecutive years has been removed. Now, OPCs will be able to grow without the above restrictions and this move will provide flexibility to founders to convert the OPC at any time. To reduce the burden of compliances under company law provisions, for a company to qualify as a ‘small company’, the paid-up capital threshold has been increased from Rs 50 lakhs to Rs 2 crore and the turnover threshold has been increased from Rs 2 crore to Rs 20 crore.

Dispute Resolution Committee (DRC)

For providing an opportunity to small taxpayers to settle long-pending disputes and be relieved of further strain on their time and resources, a DRC is proposed to be set up. DRC shall be faceless to ensure efficiency, transparency and accountability. Only disputes where the returned income is not more than Rs 50 lakhs (if there is a return) and the aggregate amount of variation proposed in a specified order (order) is not more than Rs 10 lakhs shall be eligible to be considered by the DRC.

Time limit for assessment and re-assessment reduced

To reduce compliance burden and provide certainty to taxpayers, the time-limit for re-opening of assessment is proposed to be reduced to 3 years from the existing 6 years from the end of the relevant assessment year. Re-opening of assessment up to 10 years will be only allowed where there is evidence of undisclosed income of Rs 50 lakhs or more for a year. Further, discretion in re-opening and henceforth re-opening is removed, henceforth re-opening shall be done only in cases flagged basis data analytics, the objection of Comptroller and Auditor General, and where there is evidence for tax evasion in search and survey cases.

The writer is Partner, EY India. Palak Bansal, Tax Professional with EY has also contributed to this article.

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